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Enron Mail |
On the Level
<On the Level: Level 3 Is Fully Funded. Right <By Brett D. Fromson <Chief Markets Writer <2/27/01 6:47 PM ET <URL: < http://www.thestreet.com/p/comment/onthelevel/1322230.html <http://www.thestreet.com/p/comment/onthelevel/1322230.html<; < <Sometimes you just have to smile. <Take, for instance, tonight's King of Comedy, Level 3 <Communications(LVLT:Nasdaq), perhaps the most aggressive of the big, <money-losing telecommunications service providers floating on a sea of debt. < <Last year, the company lost $1.5 billion after taxes. There are questions <about its long-term financial health. And through it all, Level 3's <management continues to reassure investors that the company is "fully <funded" to get to break-even. Investors in this beaten-up stock naturally <find such assurances soothing. <They shouldn't. <Late last month, Level 3 filed to sell $3 billion in new debt securities -- <preferred and common stock to finance working capital and capital <expenditures. Companies that are fully funded do not typically serve notice <that they may need to borrow another $3 billion to pay bills and make the <investments required to stay in business. <Level 3 matters to investors for a number of reasons. First, because it <represents the entire New Era telco sector, which has seen more speculative <money thrown at it than any other high-tech sector in the past five years. <And that is saying something. If Level 3 runs into financial trouble, you <can bet a lot of other telco services companies will, too. And second, if a <slow-motion liquidity crisis hits the sector, it will not be good news for <related industries such as telecom equipment, semiconductor manufacturers <and contract manufacturers. As bad as the news has been for these industries <already, if telecom continues to roll over, the news could get worse. <(That's for all you folks looking for the bottom in tech.) <Level 3 is also worth paying attention to because there is a staggering <amount of money at risk. Here are a few relevant numbers: The company's <market capitalization is about $10 billion. It carries $7.3 billion in debt. <It has about $4 billion in cash that it plans to spend real soon. By <year-end, cumulative capital expenditures will reach $13 billion to $14 <billion, which is a lot of money for a company that went public only in <1998. By 2010, cumulative cap ex is expected to top $40 billion. Global <networks don't come cheap, you know. <You might reasonably ask, will Level 3 even get to 2003 -- let alone 2010? <The answer may hinge on whether the company is as fully funded as it claims <to be. <Last November, this column raised questions about Level 3's claims to be <fully funded. Company management was not pleased. <Robin Miller, Level 3's vice president for investor relations, wrote in: <"The fact is that Level 3 is one of the few emerging communications <companies to be fully funded. Level 3 is fully funded through free cash flow <break-even, at which point we are obviously self-funding." <Well, on Jan. 18 of this year, "fully funded" Level 3 filed its $3 billion <shelf offering. The stock lost $1.70 a share that day to close at $45.30. <Today, it closed at $26.56. <Today, we tried to reach Miller by phone to ask why a fully funded company <like Level 3 would file a $3 billion shelf offering. She was unavailable, <but Level 3's director of media relations, Paul Lonnegren, was. He said that <the $3 billion filing "doesn't necessarily mean that the company has any <intentions or plans to raise the money. ... It doesn't mean that we are <going to go back to the market for more cash. ... We are confident we can <get to cash-flow break-even without having to get more money from the <market. We project cash flow break-even by 2004. ... We did not file to <raise more money in case we are not fully funded. It was in case the markets <bounce back positively enough to make the cost of money attractive. Of <course, there are no signs of that happening." <No, there isn't any sign of the financial markets opening up for the likes <of Level 3 anytime soon. There was a brief moment in January when the junk <bond market eased a bit for high-risk borrowers. That was when Level 3 <filed. But today, if Level 3 wanted to raise money in the debt market, it <would have to pay north of 15% -- if it could get the money at all. <The idea that Level 3 can ease its debt payment problems by borrowing <another $3 billion at 15% to 20% is laughable. Such new debt would be more <expensive than existing debt. And according to the January registration <statement, the company already had "deficiencies of earnings to fixed <charges of $997 million for the nine months ended September 30, 2000." If <Level 3 adds more debt, its debt-service costs simply go up that much more. <Lehman Brothers' convertible debt analyst Ravi Suria wrote in a report last <year that "a company [is] fully-funded only if it has enough cash to last it <to a point when it becomes capable of paying at least the ... fixed charges <from internally generated operating cash flow or EBITDA." By this measure, <Level 3 is not fully funded. If the company were, it would not have filed to <borrow another $3 billion to fund operating expenses and the buildout of its <network. <Level 3 management can say anything it wants about the company being fully <funded. Investors should make up their own minds. <--------------------------------------------------------------------------- - <---- <Brett Fromson writes daily for TheStreet.com. In keeping with TSC's <editorial policy, he doesn't own or short individual stocks, although he <owns stock in TheStreet.com. He invites you to send your feedback to < bfromson@thestreet.com <mailto:bfromson@thestreet.com< < < - att1.htm
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